Deloitte's Ninth Annual Fair Value Survey Reveals Mutual Fund Valuation Processes Hold Steady in the Face of Global Events

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Sep 20, 2011, 09:19 ET

NEW YORK, Sept. 20, 2011 /PRNewswire/ -- Mutual fund valuation policies and procedures successfully withstood unprecedented market volatility caused by economic uncertainty, unrest in the Middle East and environmental disasters, according to Deloitte's "Ninth Annual Fair Value Pricing Survey."

"When faced with recent events that added significant stress to global markets, our survey indicates that mutual funds are well prepared to handle investment valuations," said Cary Stier, vice chairman, Deloitte LLP and asset management services leader. "They knew what to do and how to monitor unique situations. As evidence of that, our survey further shows that 35 percent of participants made no changes to their valuation policies this year, more than double the 15 percent reporting no changes last year."

While valuation policies and procedures may not have changed dramatically, the record number of survey respondents suggests that fair value continues to be important to fund groups and their boards. Many participants say they made minor changes to their policies and procedures, indicating that they understand the need to amend or to supplement current policies and procedures to address lessons learned from the past and to respond to future risks.

"When you build it well, it's built to last," said Elizabeth Krentzman, Deloitte U.S. mutual fund practice leader. "Knowing this industry as well as we do, we aren't surprised that not a lot of tinkering was required over the last year. In an already highly regulated environment, mutual fund firms are accustomed to updating their valuation procedures and practices when needed, such that they got to a good place that worked over the last year."

Internal controls and governance activities remain focal points, with key survey findings including:

Secondary Pricing - More than 60 percent of survey participants undertake daily comparisons of equity pricing from a primary source to a secondary source; the figure drops to less than 30 percent for fixed income securities.

Price challenges - 20 percent noted that price challenges resulted in a change in valuation more than 50 percent of the time.

Real-time involvement – More than 20 percent of respondents indicate that their policies and procedures identify situations that require involvement of a fund director prior to valuation.

"Fixed income instruments – traditionally valued differently than equities due to their relative illiquidity – were a challenge during the credit crisis," said Rajan Chari, partner, Deloitte & Touche LLP and the Fair Value Survey leader. "Although we did not see a dramatic change in fixed income valuation practices from our previous survey, we took a slightly longer-term look and noticed a 20 percent drop in fund complexes using the bid price exclusively to value fixed income securities, while those using the mean price exclusively has moved up to 36 percent. This is a substantial change that likely underscores the impact the credit crisis had on valuation policies and procedures."

Deloitte's Ninth Annual Fair Value Pricing Survey aggregates the views of 79 asset managers from around the world who advise more than 3,300 mutual funds with $2.6 trillion in assets under management. The population of survey participants represents a diverse mix of asset managers encompassing various sizes, asset classes, and geographies. The survey queried participants between mid June and August 2011 about the one-year period ending May 31, 2011.

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